Last week, Albertson's (NYSE:ABS), the nation's No. 2 grocer, reported an 18% rise in third-quarter earnings, along with a double-digit jump in sales (aided by two recent acquisitions), improving comps, and lighter expenses. The results were another sign that grocers are on the mend and slowly recovering from a devastating labor dispute. Then again, lapping a strike-impacted period where net income plummeted 51% on declining same-store sales should have made for easy year-over-year comparisons.
A gain is a gain, though, and industry leader Kroger (NYSE:KR) followed this morning with even stronger third-quarter numbers, leaving the contentious strike a little further in the rearview mirror. Further disruptions arising from labor disputes may pop up again, but for now, the former teammates -- along with Safeway (NYSE:SWY) -- at the collective bargaining table can resume their roles as bitter rivals in this fiercely competitive business.
This morning, Kroger posted net income of $142.7 million, a 29% increase over the $110.2 million it earned a year ago, when the strike was just getting under way. Still, analysts were anticipating even more, as earnings of $0.19 fell four cents short of expectations. Sales rose 6% to $12.1 billion, helped by a solid 1.8% advance in identical-store sales (excluding fuel) -- Kroger's fastest growth rate in that key metric in over five years. Including fuel (the company owns 520 supermarket fuel stations, along with nearly 800 convenience stores), comps would have gained 3.2%.
However, both Albertson's and Kroger paid a steep price for their sales growth. Promotional activity designed to attract customers -- particularly in Southern California where many had defected to stores such as Whole Foods Market (NASDAQ:WFMI) -- has trimmed margins, although an increase in low-margin fuel sales was also a factor.
Kroger is seeing some strength in its Southern California Ralph's and Food 4 Less stores, and Albertson's has reported that sales in the region have returned to prestrike levels. But slashing prices to regain lost market share is going to be painful for a company with razor-thin operating margins of around 2%. Furthermore, though new labor contracts in Seattle and Cincinnati have been ratified without incident, Kroger and its peers are still at a disadvantage to non-union discounters such as Wal-Mart (NYSE:WMT).
Kroger has been adept at retaining market share and in fact gained on Wal-Mart last year in two-thirds of the markets where the two compete head-to-head. It may well be the king of the traditional grocers, but it is still a crowded, low-margin, slowly growing domain.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
